The Three Main Levers of Profitability (Part 1): Decreasing Costs

If you’re new to our weekly entrepreneur newsletter, welcome! Each week we research the most pressing issues for small business owners and entrepreneurs, then share insights, strategies, and expertise to help you overcome challenges and reach your goals. We hope you enjoy today’s edition!

In This Issue

• 3 Paths to Better Profit: Discover the three core levers you can pull to improve your business’s profitability and cash flow.
• Focus on Cost Reduction: Learn why cutting costs often delivers the quickest gains—and how you can start immediately.
• Preview of What’s Next: Look out for upcoming editions on strategies to increase sales volume and raise prices.

Why Focus on Cost Cutting First?

Many business owners dive head-first into chasing more sales—only to find that operating costs climb just as quickly (or even faster). If your business is spending more than it earns, ramping up revenue alone won’t fix your bottom line. That’s why, in this three-part series, we begin with the most immediate lever of profitability: reducing expenses.

Three Fundamental Moves

1. Decrease Costs/Spending
2. Increase Sales Volume
3. Raise Prices

By tightening your belt before pursuing growth, you ensure more of every dollar you earn stays in your pocket—and that your profit compounds with each additional sale.

Why Cost Cutting Comes First

• Immediate Control: You decide your spending—no dependence on market forces or consumer trends.
• Less Risk, Faster Impact: Cutting unnecessary expenses can boost cash flow instantly. Most companies can trim 10–15% without sacrificing customer value.
• Stronger Growth Foundation: When costs are lean, every new sale delivers real profit and funds future expansion.

Step-by-Step Cost Reduction Strategy

1. Perform a Thorough Expense Audit
   • List all outflows: rent, payroll, software subscriptions, memberships, and small recurring fees.
   • Ask “Why?”: Is each cost essential to delivering value? If not, eliminate, reduce, or renegotiate it.
   • Use our “PRU Analysis” template to categorize each expense as:
     • P (Profit): Essential costs that directly contribute to customer value.
     • R (Reduce): Costs you can renegotiate or lower without losing value.
     • U (Unnecessary): Expenses you can remove entirely.
2. Separate Fixed vs. Variable Costs
   • Fixed Costs: Expenses that don’t change with sales volume (e.g., rent, insurance). Negotiate or eliminate non-essentials.
   • Variable Costs: Expenses that scale with revenue (e.g., materials, shipping). Streamline processes to lower these as you grow.
3. Negotiate With Vendors
   • Bulk Discounts: Ask suppliers for better rates on larger or consistent orders.
   • Alternate Vendors: Shop around for commodities or services to find cost savings.
4. Increase Operational Efficiency
   • Automate Repetitive Tasks: Replace manual work with software or systems.
   • Eliminate Redundant Steps: Map workflows, identify bottlenecks, and remove anything that doesn’t add value.
5. Monitor & Maintain
   • Schedule regular expense reviews (monthly or quarterly) to prevent cost creep.
   • Set target ratios for overhead, materials, and other categories—track them religiously.

Laying the Groundwork for a Healthy Business

Cost cutting isn’t about depriving your business—it’s about streamlining operations, eliminating waste, and building a stronger foundation. With tighter cost controls, any future growth in sales or pricing flows directly into higher profits, helping you achieve both personal and professional goals.

What’s Next?

Stay tuned for Parts 2 and 3, where we’ll tackle the other two levers of profitability: increasing sales volume and raising prices.